Customer loyalty programs are everywhere.

When you grab a coffee from a Starbucks, you’re racking up “stars” you can redeem for free drinks.

Your email inbox is filled with offers and discounts from local brands and stores you purchased from.

And if you’ve signed up for your airline’s frequent flyers program, taking a few flights will earn you free trips.

Brands big and small have loyalty programs in place to acquire new customers and build strong relationships with them to improve customer retention rates and lifetime value (LTV).

But the current design of loyalty programs is deeply flawed — most of them are a series of disconnected promotional offers or half-baked reward schemes. You can compare this to reading a novel where each chapter isn’t stringed together to form a cohesive story. As a result, you fail to understand the overall story and lose interest.

Such loyalty programs do not add any value to the customer’s experience and hence fail to do the one thing loyalty programs are supposed to do — improve brand recall and loyalty.

According to a 2021 Merkle Loyalty report, 45% of customers believed that it took too long to earn a reward and 31% of them believed brands made it difficult to earn a reward.

As a result, customers lose interest in the program and many of them even stop redeeming points and earning rewards.

In a bid to address the limitations of traditional reward systems and better engage consumers, brands are now starting to embrace web3 loyalty programs.

In this blog, we unpack the limitations of web2 loyalty programs, how web3 addresses them, and why you should adopt web3 loyalty programs if you want to build loyalty from the first sale.

What is a web3 loyalty program?

Web3 loyalty programs are loyalty programs that use blockchain technology and cryptocurrency assets alongside web2 solutions to create more personalized customer experiences. This helps build long-lasting relationships and ensures customers have benefits that they actually care about.

That means, web3 loyalty programs go beyond freebies and discounts that customers often forget about or have limited options to redeem.

Take the Starbucks Odyssey program, for instance. It rewards users with digital collectibles (as crypto NFTs) called ‘Journey Stamps’ in exchange for completing interactive activities called ‘Journeys’.

Users who manage to collect Journey Stamps unlock different levels of benefits and experiences that become richer and more unique at higher levels.

In addition, users can also buy or sell these stamps on Odyssey, an NFT marketplace built on the Polygon blockchain.

Compare this with other loyalty programs from Starbucks which are mostly disconnected experiences and keep changing every year.

Adam Brotman, a former chief digital officer at Starbucks, stressed on a similar subject when he told FastCompany, “Millions of people sign up every year to win more prizes, but the interest fizzles out in just a month.”

The reason this happens is simple — Starbucks (and every other brand) offer rewards but don’t focus on adding value or personalizing it.

Web3 loyalty programs make it easy for brands to create personalized experiences and enable consumers to take ownership of their experience. The open and permissionless nature of web3 lets brands to partner easily and add value to users beyond just a single brand.

Evolution and challenges of loyalty programs

Loyalty programs started out as a novelty — some U.S. retailers merchants would offer copper tokens that customers could redeem for future purchases.

As minting copper coins became too expensive, companies switched to a cheaper option — redeemable stamps and coupons. These stamps remained popular until the late 20th century.

Slowly, loyalty programs spread from retail to the airline industry, which started acquiring user data apart from rewarding customers.

Although Texas airlines was the first to launch a loyalty program, the American Airlines’ frequent flier program from 1981 is considered the first modern and successful comprehensive loyalty program.

The airline searched SABRE, America’s reservation system at the time, to collect personal information on repeat customers. They then rewarded customers based on the number of miles they had flown.

Customers with miles accumulated could obtain discounted car rentals and hotel stays, upgrade to business class, and get access to more benefits like separate check-ins and priority upgrades.

After the program’s success, other airlines followed suit and by 1988, almost every airline had a loyalty program in place.

Major airlines then increased the number of miles needed to obtain a reward and added an expiration date to compel customers to redeem their rewards before the period ended.

Loyalty programs have become increasingly common since then. And fast forward to today, most brands offer customized loyalty programs via mobile apps.

The ‘Star’ reward program we mentioned is a great example of this. Every $1 a customer spends via the Starbucks app yields a certain number of stars. Once they’ve collected enough stars, they can redeem them for free drinks.

All in all, loyalty programs have gone from being a nice-to-have to a must-have for all brands. But this has created many challenges for brands and consumers alike.

Traditional reward systems aren’t economically viable

Today, more than 65% of customers want loyalty programs to reward them with free products.

They want to extract the most value out of it and get valuable gifts for signing up and investing in it.

But every dollar of value given away is a real expense for the business. So, they need to strike a balance between differentiating themselves from the competition and not giving so much value for free that the program becomes a major cash-burn engine.

And in a bid to cover the costs of the rewards and generate more sales from repeat customers, brands rig the loyalty program in their favor, which brings us to the next challenge.

But brands must understand that every dollar of value given away, although good from a customer’s perspective, is a real expense for the business. Thus, businesses must strike a balance between differentiating themselves from the competition and not giving so much value for free that the program becomes a major cash-burn engine.

Plus, an average customer has signed up for more than 16.7 loyalty programs, so if they don’t receive valuable rewards from a brand quickly, they’re going to take their business elsewhere.

Long story short, a business must make sure that their spend on every user in a loyalty program is lower than the total value the user spends on the brand over a certain time.

Loyalty programs are highly one-sided

It’s common for brands to devalue reward points, make it difficult for users to earn rewards, and add expiration dates to redeemable points to save costs.

For example, the Marriott Benvoy Hotel’s point valuation fell from 1.2 cents per point in 2019 to 0.7 cents in 2021.

Let’s say the hotel’s reward system allowed a user to redeem a gift when the points collected amounted to 10 cents.

Since there was a 41.6% drop in value, a customer in 2021 had to wait 1.7x more compared to 2019 to reach the milestone and redeem their gift.

And that’s not all. If a customer can’t redeem their points within the expiration date, they’d have to forsake their reward entirely. Or they may have to choose a reward that they might not find useful.

Also, there’s no way for users to exchange, say, their airline miles to purchase shoes or other gifts they might find valuable.

This is because most web2 companies work within closed ecosystems, which makes data-sharing difficult and expensive.

Brands also don’t share data because they want to extract the most value out of their data while keeping most of the customer information under wraps.

This leads to brands having more control and ownership over rewards, due to which customers lose interest in the program and stop engaging with it.

Customers have stopped redeeming rewards

A 2022 research survey across the UK found that about $5.6 billion worth of loyalty points lay dormant just across three major brand outlets.

At first glance, this may seem like a money-saving scheme for brands, but it increases their Customer Acquisition Costs (CAC) in the long run.

In other words, that’s not $5.6 billion in savings, it’s thousands and millions dollars of lost customer lifetime value (CLV). Let’s say the number of customers who signed up for the loyalty program in all three outlets is about 50 million. If the average CLV is $10 and if 1 million customers decide to leave, the brands will incur losses of $30 million over a span of 3 years.

Plus, according to studies, it costs 16x more to bring a new customer to the same level of profitability as the old one.

This is because it costs more to acquire new customers, get them acquainted with the brand, and retain them in the long term.

TLDR; web2 loyalty programs don’t benefit the brand or the customers in the long run as brands can’t partner with other brands and must stay sustainable while offering freebies.

Web3 fixes most problems of traditional reward systems

Composability and interoperability are two key characteristics of web3 that eliminate problems with traditional reward systems.

Composability is the ability to combine software components like Lego blocks to build new applications. It enables interoperability, which refers to the ability of software to exchange information with each other.

Together, composability and interoperability allow you to partner with brands outside your ecosystem so customers can use their loyalty points however they wish.

This creates room for more innovation and helps you come up with better ways to engage customers and retain them.

Moreover, web3 loyalty programs can reward users with non-fungible tokens, which means they have complete ownership over them and brands can’t devalue them.

Plus, once they’ve acquired an NFT, users can trade them for other NFTs or sell them in a marketplace like OpenSea.

As a result, web3 loyalty programs create a win-win situation for customers and brands alike. Here’s how it benefits brands.

Reduced customer acquisition costs

High CAC and low LTV are words you don’t want to hear as a brand because it means the lifetime value of the purchases your customer will make won’t be enough to make up for the money you spent to acquire them.

Web3 loyalty programs fix this. They make your loyalty program a continuous, highly engaged experience that feels like a seamless journey for customers. This incentivizes users to engage with your brand regularly and turns them into frequent buyers and brand evangelists who spread the word about your brand.

Since people trust people more than brands, potential users who come across user-generated content like testimonials and guides will start trying your product.

This will kickstart a positive feedback loop where loyal users spread the word about your product, new users sign up to your product in droves and reduce your CAC by 16x.

Improved customer engagement

Web3 loyalty programs leveraging behavioral loops can incentivize users to continuously engage with your brand, connect deeply with your products, and keep coming back for more.

A behavioral loop consists of four elements namely a trigger, action, investment, and reward. Let’s take an example of a web3 e-commerce loyalty program. Whenever a user signs up for the program and makes a purchase, they get Ethereum-based loyalty tokens. They also earn NFT collectibles when they complete certain milestones.

Incentivizing users with valuable rewards act as a trigger, which then leads to users taking action and investing time in your product, store, or service. That usage then earns rewards in the form of loyalty tokens and digital collectibles which then closes the loop.

These digital experiences can be supplemented with rewards, activities, and access in the real world, creating a truly immersive and fun experience for your customers. Unlock merch, early access, better deals, or any other reward that resonates with your specific customer base.

In the long run, this loop helps your users form a habit and makes them return to your platform regularly.

As a result, users start making repeat purchases, which improves the LTV metric and improves brand equity and brand loyalty.

Better consumer insight

You need to collect accurate user data to create more personalized experiences for your consumers.

But how do you do that without infringing on your customer’s privacy?

Zero-party data.

The term was coined by Forrester research and refers to the data that users willingly and proactively share with a brand.

While it’s difficult to get users to exchange data with traditional loyalty programs (there are only so many offers and free gifts you can give), it’s much easier with web3 loyalty programs as they offer tokens and collectibles.

For example, you could offer tokens in exchange for personal data like email addresses and names, so users see a direct benefit in sharing the information with you. In this way, your users’ trust is earned, not assumed.

Engage users with a web3 loyalty program

Although web3 loyalty programs offer more benefits than their web2 counterparts, it’s difficult to add personalization to the mix and give them the rewards they want because you’re marketing to pseudonymous users behind a wallet.

Raleon changes this and enables you to create highly personalized loyalty programs that improve customer retention.

Track on-chain activities

Raleon tracks on-chain activities across users’ wallets and gives a list of all the dapps they’ve interacted with using their wallet. This enables you to create personalized rewards.

For instance, if your users have interacted with NFT marketplaces a lot, then you can reward them with your NFTs instead of rewarding them with your tokens. This is true for any tokenized reward — dApps, POAPs, ecommerce, digital collectibles, and even in-real-life programs like Starbucks.

Filter audiences

Now that you’ve tracked on-chain activities to figure out your customers’ preferences, you need to filter and segregate them so you can reward them accordingly.

You can set these filters with just a few clicks on Raleon. Simply go to the Audience section and the following criteria to segregate the audiences who have purchased NFTs within the last 30 days.

Create personalized journeys

With Raleon’s engagement features, you can transform your loyalty programs into ongoing journeys that are interactive and gamified so users can look forward to them.

For example, using Raleon, you can set up loyalty programs similar to adventure games with lore, characters, narrative arcs, and more gamification mechanics.. Each step of the game can be modified based on the response or action of the users. When a user completes a part of the program journey, you can then send them a reward personalized to their preferences or journey.

Supercharge your bottomline with web3 loyalty programs

It’s time to wake up and smell the coffee — traditional reward systems are slowly dying out as they’re transactional in nature.

Although a majority of brands have a loyalty program, they know they’re playing a losing game as users favor the brands with the most freebies and discounts.

So, to make the best out of a bad situation, they design programs that make it difficult for customers to acquire rewards. As a result, customers drop out of these programs.

This is where web3 loyalty programs come in. Their composability and interoperability create a win-win situation for you and customers alike.

Web3 loyalty programs help them break away from walled gardens, collect accurate data to build personalized programs and keep their customers coming back for more.

The best part? Setting them up is super easy with Raleon. Our platform uses AI to connect on-chain and off-chain data so you can track their activities without infringing on their privacy and reward them easily.

Create, track, and optimize web3 loyalty programs in one place

If you need help with building your audiences, using the dashboard, connecting your off-chain activities with on-chain transactions, or simply want to talk about best practices in Web3 marketing, we’d love to have a chat with you. Click here to connect with an expert at Raleon and get your queries resolved.